Monday, January 29, 2018

Q4 Growth Misses 3 Percent

Popular Economics Weekly

Consumers and businesses powered the economy to a 2.6 percent rate of gross
domestic product growth in the final three months of 2017, according to the
Commerce Department. But declining inventories and a wider trade deficit kept
the U.S. from hitting the 3 percent mark for the third quarter in a row for the
first time in 13 years.

Q4 growth did not reach 3 percent as many pundits had hoped because producers
produced less, depleting inventories. And imports grew faster than exports,
because consumers are buying more, as more consumers are working in this full
employment economy. Both numbers subtract from GDP growth, however.

On the plus side, consumer spending accelerated to a 3.8 percent annual pace
of growth, the fastest pace in almost two years. Americans spent more on new
cars and trucks, clothing and health care, among other things.

Businesses also invested more, after a long drought in capital expenditures.
They increased spending on equipment by 11.4 percent, while investment in new
housing jumped 11.6 percent. Inventories fell because companies slowed
production in the fourth quarter. The value of unsold goods, or inventories,
fell by $29.3 billion.

Imports rose 13.9 percent, while exports grew just 6.9 percent, and imports
subtract from growth. That cut 1.1 percentage points off fourth-quarter GDP, and
there is still very little inflation. The annual rate of inflation, measured by
the PCE index is climbing; it rose to 2.8 percent, the highest pace since 2011.
But the core PCE without more volatile food and energy prices rose at a slower
1.9 percent clip.

What does this mean? There is more room to grow, if consumers continue to
spend as they have been, and businesses continue to invest in new plants and
equipment, as they have in 2017, because more investment will increase worker
productivity.

And economic growth needs higher productivity plus a growing population. Yet
developed countries such as the US have slowing population growth, so robots, AI
and other tech innovations have to replace the declining worker population.
Republicans’ tax cuts should aid the corporate investment in more robots, which
is good. But their wish to cut government spending is bad, because government is
historically a 20 percent contributor to economic activity—and growth.

That’s because governments maintain our roads, bridges, energy grid,
educational system, clean air and water; R&D for space exploration, Internet
and airports—the list goes on and on. And government expenditures have been
reduced since 2011, due to misplaced austerity measures in the US and Europe in
particular.

This is a major reason GDP growth both here and in Europe has averaged just 2
percent since the end of the Great Recession. Corporations have garnered record
profits over this time, but hoarded those profits, or returned them to their
CEOs and stockholders, but not their employees.

That has to change for real economic growth to continue. Raising minimum
wages in some states will help, but lower taxes don’t help with such a huge
national debt and another $1.5 trillion being added over ten years in the new
tax bill. Real wage growth has been declining for years, as collective
bargaining and workers’ rights have been curtailed in the name of greater
corporate profits.
We can hope GDP growth will continue, if paying down the national debt
doesn’t become a priority.

The US dollar’s value has already declined 10 percent
against other currencies, and the reason is not clear. But any further decline
could motivate other countries to decide that investment in the US may not be a
good idea; since much of our national debt is financed by other countries.

It is not a good idea to ignore what could happen to the $trillions in
Treasury securities we have sold to the Chinese, in particular, that have
financed that debt. Because it
could suddenly become much more expensive to finance, should foreign governments
and private entities no longer have confidence in the US economy.

Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.